Canada leading ranks of shrinking middle class

A new study shows Canada’s middle class as a world leader in income, but before we get too excited it’s worth noting we are just leading a shrinking class around the globe.

An analysis by the New York Times, using data from LIS which runs the Luxembourg Income Study Database, found that as of 2010 Canada after-tax middle-class income earners had passed their U.S. counterparts after being well behind in 2000. The study shows median per capital income in Canada even ahead of countries like Norway or The Netherlands.

“What the story shows is relative to middle class Americans, Canadians did better,” said Craig Alexander, chief economist with Toronto-Dominion Bank.

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Mr. Alexander did his own study at the end of 2012 comparing income inequality between Canada and the U.S. and found Canada income inequality is exaggerated by the top 1% while south of the border it encompasses a wider top section of earners.

“There are so few people in that category, you are not seeing the income inequality that you see in the United States,” he says.

His own study shows that the middle income earners — the middle 20% of society — had real income growth of 13.9% from 1998-2012 while those in the top 20% had real growth of 18.4% during the period.

The Times study found median per income per capita was US$18,700 in the United States in 2010, up 20% since 1980 but almost unchanged since 2000 when inflation is factored in. Median income in Canada rose almost 20% adjusted for inflation between 2000 and 2010 to tie with the median U.S. income at $18,700, and has most likely surpassed it since, according the The Times story.

“Governments in Canada and Western Europe take more aggressive steps to raise the take-home pay of low-and middle income household by redistributing income,” it said.

Mr. Alexander says there is pressure on Canadian middle class households but “it’s not as acute” as what the United States has seen.

He notes between 1998-2010 Canada had a very good labour market and that helped to mitigate any hallowing out of the middle class, adding the unemployment rate was the lowest in three decades.

“It translated into wage gains but you can still see the effect on middle income households from globalization, from off-shoring, from the IT revolution that was hollowing out the U.S. middle class but was having a much lesser effect on the Canadian middle class,” says the economist.

Mr. Alexander says some of the sectors that were delivering a strong economic performance like construction and resources helped to spread some of the wealth around.

“The Canadian real estate market only pulled back for a quarter or two and came back roaring back to life,” he says. “There were lots of jobs in the resource sector and that’s middle skill, middle income jobs,” he says.

The debate over Canada’s middle class has made its way to Ottawa with Liberal leader Justin Trudeau making it a daily feature of question period while NDP leader Thomas Mulcair has promised to reduce income disparity in Canada.

Employment Minister Jason Kenney used the report to take credit for Canada’s stronger middle class by retweeting on Twitter, “Canada is officially home to the richest middle class on the planet,” and “If Justin Trudeau is interested in evidence-based policy on the middle class, he should read this.”

The government has downplayed income inequality gaps and recently referenced a February Statistics Canada report that showed median net worth rose almost 80% to $243,800 between 1999 and 2012. A large part of that increase can be attributed to rising home values.

Benjamin Tal, deputy chief economist at CIBC, noted median income is almost 10% higher in Canada even factoring in the impact of currency differences between the two countries.

“My point, however, is that it is not that we are doing great but that they (the Americans) are doing very badly when it comes to a widening income gap,” he said. “When you look at Canada over the past 15 years what’s interesting is that
the two groups that have seen the most significant growth in income were the bottom 20 and the top 20. The middle has seen its income growth lagging. . . . So the bottom line is that the fact that we are doing better than the U.S. is no cause for a celebration.”

David Macdonald, an economist with the Centre for Policy Alternatives, says the Times study used different methodology to compare a diverse range of countries. If Statistics Canada data is used it shows median incomes rising at a slower pace than reported by the newspaper.

“Picking the U.S. in 2010 also discounts the fact there was a major global recession whose epicentre was the U.S. and hurt a lot of the big European countries as well,” he said. “This was at the worst times for the U.S. middle class.”

He notes Canadian families are among the most indebted with a record high household debt of about 164% of after-tax income.

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